Ask Brian: Will My Investment Deal Lose Money?



Ask Brian: Will My Investment Deal Lose Money?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

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Question. Elaine from Corpus Christi, TX writes: Hi Brian, I’ve been investing in single family houses for about 6 years and tend to be an optimist. Recently, I had a bit of an epiphany when I realized that as the market slows or at least changes, I could possibly lose money on my next deal. My strategy of rehabbing and renting for about a year before selling as a turnkey rental has been successful. I’d like to continue this strategy but wonder what questions I should be asking to be more comfortable that my next deal doesn’t go south?

Answer. Hello Elaine. That’s a great question. It’s easy to get excited when you’re sure you’ve found a great deal but just as easy to fail considering the possible down sides. Since the markets are slowly changing, a good place to start is by going back to basics. From what you wrote, your basics are finding a house needing modest repairs at a discounted price, dependable contractors, quality tenants, and a secondary market for turnkey investors. That’s a significant list of variables. But you do have experience with the strategy.

The one constant in real estate is location, location, location. Your research needs to be mostly local rather than national. Investing is about risk and reward. As you identify risks (and you will) take note of the risk level and how you can mitigate the risk. You might rate both the risks and mitigation plans on scales from 1 to 10. If you rate the risk as a 7 and the mitigation as a 4, you should consider the risk too high and look for an opportunity with a better chance of success. Of course, there are variables that go into accessing the risk and mitigation such as the amount of money at risk versus the amount of profit potential. But giving each risk serious thought keeps your decision process even-keeled.

Elaine, in your situation, a few of the critical issues to look at are:

  • The local employment picture. Is the unemployment rate low and steady? Are any employers shutting down or new employers starting operations? Knowing wage trends helps you understand what tenants can afford as well as what turnkey investors will be willing to pay based on house value appreciation.
  • Regarding quality tenants, what’s the current situation with vacancy rates and rent trends?   
  • Your understanding of value appreciation trends and sustainability should also be refreshed as the market shifts.
  • Construction and contractor availability should also be a concern. New construction has not been keeping up with demand. How long has it been since you worked with a contractor on a rehab? Are your preferred contractors available and have their prices changed? Are their subcontractors and labor pool intact?
  • What about your funding sources? Are you buying with all cash? Is reasonable financing available if you need it? Will you flip one of your existing rentals to finance the next project? Do you have backup funding sources and a reserve account?
  •  Do you have a contingency plan if your first strategy doesn’t work out? What if it takes three months to find a qualified tenant and you have to lower the rent? If you do find a tenant but can’t flip to a turnkey investor for an acceptable profit, what is your back up plan? If you become a long term landlord, what happens to your future investing plans? Is turning it into an Airbnb short term rental a more profitable opportunity?
  • What other real estate investment strategies should you be considering and pursuing? When the market is in flux is a good time to reevaluate your other options.
  • What are your competitive advantages with your turnkey strategy as well as any other opportunities you have?

Elaine, it appears that your epiphany came at the right time. Every investor needs to periodically reassess the market, their strategy, and their portfolio. Do a complete Strengths, Weaknesses, Opportunities, and Threats analysis (SWOT). List all of the risks in your marketplace and with your strategy. Brainstorm how to minimize the risks and exploit your strengths. There are good times and not so good times to pump investment money into the market but there are no hard rules that apply to every investor. Some buy and hold when the market is at rock bottom. Others jump in when the tide is raising all boats. And most sell when the market is peaking. What is important is that you know your market, its trends, what drives the local economy, etc. Slow and steady growth in rents and home prices is almost always a good sign.

What are your tips for astute investors in a changing marketplace and economy? Please leave your comments.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.

Comments

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